Will Pay-As-You-Go Insurance Save the World?
April 21st, 2008 by Jeb Foster
“U.S. auto insurance is generally an all-you-can-eat affair.” That’s according to rogue economists Steven Levitt and Stephen Dubner, authors of the popular book and blog “Freakonomics.”
In a recent article in New York Times Magazine, Dubner and Levitt make a compelling case for pay-as-you-go insurance pricing.
According to Levitt and Dubner, our current driving system (if you can call it that) has over $300 billion in unpaid costs (well, actually, they’re not unpaid. They’re simply not being paid by the people who are running up the tab). Here are the price tags associated with our current system:
~ Carbon emissions: $20 billion a year
~ Wasted fuel and lost productivity due to congestion: $78 billion a year
~ Auto crashes: $220 billion a year
Dubner and Levitt believe that the “externalities” (fancy word for negative results) linked with driving — CO2 emissions, crashes and congestion — could be curtailed with insurance coverage that rewards people who drive less and punishes (that’s a harsh word–penalizes) people who drive more.
To a certain extent, we already have pay-as-you-go pricing, but it’s predicated on people self-reporting their annual mileage, “which has an obvious shortcoming,” say Levitt and Dubner. (In general, economists don’t trust anyone to do the right thing unless it’s in their economic interest to do so; maybe that’s why they call it the ‘dismal science.’) In the case of self-reporting of mileage, it’s pretty clear that the financial incentive is to under-report–and let’s call that practice by it’s true name: insurance fraud!
As things stand now, a person who drives only to the corner store on weekends pays about as much (give or take) in insurance premiums as the guy who burns up the highway every day. What’s unfair is that the latter driver contributes far more in terms of the evil Cs — carbon, congestion and crashes. Mad Max doesn’t care, though. Currently he doesn’t have to pay for his extravagant driving habits; he gives the tab (in the form of pollution and hospital bills and unlivable cities) to all of us.
Pay-as-you-go would give the tab back to Mad Max.
